The auto bailouts are now being touted by President Obama as a “success” even though the taxpayer is about to take at least a $10 billion hit when the government sells its remaining GM shares. There is, however, a missing dimension in this debate. It is the moral one.
Prior to General Motors filing for bankruptcy in June of 2009, I was involved as a GM bondholder advocate for a group called the Mainstreet Bondholders. Attempts were made by my group to bring about fair negotiations for creditors of GM, attempts that were ignored by the Obama Administration’s Auto Task Force, headed by Steven Rattner. The Task Force stated that their goal was to restructure GM outside of bankruptcy as they laid out a “take it or leave it” bond exchange offer that was supposedly designed to keep GM out of bankruptcy.
The offer was for bondholders to accept a meager 10% of equity in GM in exchange for about $28 billion of debt and required 90% approval for GM to avoid bankruptcy. What must have been millions of taxpayer dollars were spent on filing, processing and mailing the SEC documents (roughly 200 pages long) relating to the offer.
At the same time that the GM bond exchange offer was being made, six top GM executives, including Bob Lutz, sold more than 200,000 of their GM shares. While the public was being told that GM was attempting to restructure outside of bankruptcy (thus giving hope to individual shareholders), executives at GM would have been privy to insider information regarding any bankruptcy plans. If this were the case, the insider trading by the GM executives should have been investigated by the SEC. We can now refer to some quotes from Rattner in his book, “Overhaul” to confirm that there is reasonable evidence to question whether the GM insider trading was illegal.
Rattner refers to the bondholder exchange offer in his book. Rattner states, “We’d long since taken for granted that GM would need a trip through bankruptcy court, and most of GM’s leaders understood that too. Knowing that the exchange offer was doomed to fail, we had ignored this bit of Kabuki theater up to now.” Wow! A hell of a lot of taxpayer money was spent on “Kabuki theater.” In another section of the book Rattner admits, “While I was saying publicly that bankruptcy was not our focus, behind the scenes we were working intensively to figure out the best way to effect the critical restructurings.” Rattner also quotes Task Force member, Harry Wilson, as predicting that the approval percentage for the bond exchange offer would be “less than 5 percent.”
Why did GM and the Obama Administration proceed with the farce that bondholders controlled the fate of GM when they knew that the bond exchange offer would fail? Why doesn’t the SEC investigate the insider sales at GM that occurred about a month prior to GM filing for bankruptcy given the facts that executives were aware of the bankruptcy plans while the public was being told that the Auto Task Force, working for the President of the United States, was trying to avoid bankruptcy?
The simple answers are that the GM bankruptcy process was an unfair, unethical and unprecedented nationalization of a major US corporation and the American people were lied to about the goals of Obama’s Auto Task Force. The taxpayer funded bond exchange offer was designed to fail so that GM could place the blame of a GM bankruptcy on bondholders, even though bankruptcy had long been planned. Insiders at GM were aware of the plans and sold their shares of GM. The SEC has not questioned actions at GM while they are under the protective wing of the Obama Administration.
The truth is that the bailouts and bankruptcy processes of GM and Chrysler were riddled with unethical conduct and blatantly favored the politically powerful UAW over other classes. Congressional hearings and investigations should continue in order to expose the many wrongdoings of what should be recognized as an ugly chapter in American history. Anything less would condone the unprecedented actions of the executive branch of our government and risk the repeat of the trampling of contract law that transpired in the auto bailout process.
Mark Modica is an NLPC Associate Fellow.